Ever wonder why or when you should invest in bitcoin? So did these Yale economists. In a recent report, economic thought leaders considered the potential risks and rewards involved when investing in cryptocurrency. What they found was that the perception of risk is far different than you may think. Here’s why you should consider investing in bitcoin—even while mainstream media and news foreshadow its end.
First, a little background. Professor Aleh Tsyvinski and Ph.D. Candidate Yukun Liu hail from the Yale School of Economics. The two published “Risks and Returns of Cryptocurrency” with the National Bureau of Economic Research. In the report, they examine how “cryptocurrencies have no exposure to most common stock market and macroeconomic factors.” Instead, factors which they’ve dubbed the Momentum Effect coupled with investor attention determined crypto’s rise and fall from 2011 to 2018.
Is Cryptocurrency Different From Stocks and Other Currencies?
The ups and downs of cryptocurrency might remind a casual observer of the Stock Market. However, crypto fluctuates due to an entirely different set of factors; this is a major reason to consider investing in cryptocurrency.
Specifically, cryptocurrency research by Yale economists determined that the Fame French five and six-factor models, the risks that affect stock and bond returns according to Forbes, had little to no effect on bitcoin returns. Additionally, the report exposes that macroeconomic factors—including industrial production growth, non-durable and durable consumption growth, and personal income growth—did not impact cryptocurrency dividends.
Furthermore, the economists considered whether cryptocurrency functions similarly to government-controlled currencies. They compared Bitcoin, Ripple, and Ethereum to the Pound Sterling, Australian Dollar, Canadian Dollar, Singaporean Dollar, and the Euro. The report concludes that these other units of exchange have little to no effect on crypto’s returns. One of the advantages of cryptocurrency is that it’s decentralized.
Cryptocurrency isn’t simply a stock or unit of exchange. This means that when you invest in Bitcoin, you should factor in a different set of risks. And in many cases, the perception of risk is worse than the reality. Take the example of this bitcoin porn scam.
Why Do Cryptocurrencies Increase In Value?
The Momentum Effect is the first reason why cryptocurrencies increase in value. This essentially means that if the price of cryptocurrency is going up, it is likely to keep going up. This is especially true for Bitcoin and Ripple.
“A one-standard-deviation increase in the current day’s Bitcoin return predicts a 0.33 percent increase in the daily return over the next day,” the report reads. As an investor, the best time to put your money in cryptocurrency is when the price is going up.
The second significant factor controlling the value of cryptocurrency is investor attention. This means that the more people are Googling a cryptocurrency, the more its value increases. For instance, a one-standard-deviation surge in searches for “bitcoin” precipitated a 2.3 percent increase in value over two weeks. For Ripple and Ethereum, you see the impact of Google searches over the course of one week and six weeks, respectively.
Twitter has an even stronger influence on cryptocurrency’s value. The same increase in Twitter posts including “bitcoin” contributes to a 2.5 percent surge in Bitcoin yields.
On the other side of the token, negative investor attention also has a considerable impact on value. When there was a one-standard-deviation increase in Google searches for “Bitcoin hack,” Bitcoin returns decreased 2.75 over the course of the week.
When Should I Invest In Bitcoin?
Joining other blockchain business schools, Yale thinks that now is the best time to buy Bitcoin because we better understand its risks and rewards. For starters, cryptocurrency returns have little to do with the stock market or the fluctuation of other currencies. In this way, cryptocurrency can be a smarter and less risky investment.
With this said, crypto not being linked to traditional market factors doesn’t mean that we can’t predict its ups and downs. Thanks to this cryptocurrency research by Yale economists, we understand that momentum and investor interest determines Bitcoin and other currencies’ values from week to week.
This could mean that the more good press you’re hearing about crypto, the more you should invest in Bitcoin. Though historical data cannot predict the future, we have good reason to believe that Bitcoin’s upward momentum means big dividends in the years to come, despite Bitcoin’s 7.65% price drop over 24 hours.
